Managing risk

Risks and opportunities

Identifying risks and opportunities through a robust and systematic process is central to our strategic planning process. A comprehensive risk management policy is in effect throughout the group and is complemented by the Barloworld Limited risk management philosophy.

This includes dedicated divisional risk assessment interventions at which internal audit and group risk management services are present. Through the risk and sustainability committee, the board determines the levels of risk tolerance for the group as a whole and also ensures that risk assessments are performed on a continual basis by formally reviewing the divisional and group risk registers twice a year. In addition, internal audits play a significant role in reviewing processes, procedures and controls to address risks.

In line with international best practice, risks are detailed; comprehensively assessed on their probability, severity and the quality of the existing control environment; and managed through acceptance, transfer, avoidance or reduction measures. These measures result in residual risk scores that indicate the relative importance of the risk and facilitate assessment of progress made in addressing risks. Details are recorded in divisional and group risk registers.

Risks are disclosed to stakeholders in a risk matrix, which reflects the group’s top risks as well as management’s response to them.

Initiatives to address identified risks include the development and implementation of business continuity and disaster recovery plans for unscheduled events or occurrences. Plans also include information technology and communications solutions as appropriate.

Recognising the importance of including sustainable development in strategic planning, Barloworld has formalised the group’s assessment of its environmental impact on climate change and water management in line with the global Carbon Disclosure Project (CDP). Impact and risk management procedures in both of these key areas are disclosed in our 2016 CDP Climate Change Disclosure and 2016 CDP Water Disclosure.

Barloworld group top risks – 2016 (in alphabetical order)

 

 

Key risks

Category of risk and management response

SFA

1
Acquisition/joint venture underperformance

The risk of future net cash flows from acquisitions and/or joint ventures failing to realise the projections upon which the initial purchase consideration or arrangement was based may lead to value destruction for shareholders and a need to impair the related goodwill or assets.

Acquisition risk
  • A business acquisition policy and procedure is in place that sets out a structured approach and framework to be used when acquisitions and/or joint ventures are being made or entered into. This includes a pre-acquisition phase that includes the requirement to conduct a comprehensive strategic analysis of intended targets, development of acquisition criteria for both strategic and financial aspects, and the quantification of risk-adjusted value creation potential for the respective business unit and the group.
  • The acquisition phase includes legal, financial, tax, human resources, transformation, information systems and technology, technical, risk, governance and responsible corporate citizenship and environmental due diligence processes to verify and validate assumptions and future projections.
  • Following acquisitions and/or the formation of joint ventures, planning and task teams are established to focus on the realisation and management of identified value creation opportunities, including synergies.
2
Climate change and environmental stewardship

Barloworld considers a number of environment-related risks to its operations and value chain. These include climate change and related physical risks due to changing weather patterns; regulatory risks associated with greenhouse gas emissions; financial risks resulting from carbon taxes; operational risks due to constraints in energy supply and the availability of natural resources, such as water. The group identifies the predominant use of fossil fuel-based energy in its supply chain, operations, products and solutions as a risk to itself and its value chain.

Environmental/operational/strategic/financial/regulatory risk

Minimise exposure through in-depth risk assessments and strategic responses. Ensure organisational resilience through aligned and integrated management activities and policies.

These include:

  • Implementation of aspirational efficiency improvement targets in non-renewable energy consumption, greenhouse gas emissions (scope 1 and 2) and water usage, as well as an aspirational target for renewable energy consumption.
  • Association with leading principals, provision of products and solutions with reduced environmental footprint and which assist customers achieve their sustainable development objectives.
  • Geographic, industry and product diversification.
3
Competitor actions

Competitors’ actions will erode the group’s competitive position and have a significant impact on the value created for shareholders.

Competitor risk
  • Continually reduce costs by focusing on operational efficiencies and staff training.
  • Continually improve service and the provision of innovative solutions to customers.
  • Develop key customer plans which contain all the information and strategies to ensure value creation for the customer.
  • Robust strategic planning process assists in identifying industry trends and uncertainties and developing appropriate strategies in response.
4
Currency volatility

The movement of other currencies against the rand which creates risks relative to the translation of non-Rand profits, the marking-to-market of financial instruments taken out to hedge currency exposures and the cost of imports into South Africa. There are also constraints on the repatriation of funds due to shortages of hard currencies in some of the countries in which the group operates and possible losses as a result of local currency devaluations.

Financial risk
  • The responsibility for monitoring and managing these risks is that of line management. A group treasury policy is in place which clearly sets out the philosophy of hedging and guideline parameters within which to operate, and permissible financial instruments to be utilised.
  • Preventive measures are implemented in respect of the determination of pricing mechanisms and the structuring of commercial contracts to reduce the impact of any adverse currency fluctuations.
  • Geographic, industry and product diversification.
5
Defined benefit scheme exposure

One of the key risks for the United Kingdom’s defined benefit scheme over the past few years has been the reduced real yield on AA- rated corporate bonds which is used to value the liabilities. In addition, increased life expectancy of members will have an adverse impact on the scheme’s funding position. Market volatility remains a risk, with 50% of the scheme’s assets invested in growth assets (largely equities), which includes diversification into absolute return funds. The year-end valuation resulted in the deficit increasing to £161 million, largely due to reduced interest rates in the current year following the Brexit vote. As the active members have reduced substantially, the trustee board will adopt more prudent assumptions in future in line with the maturity profile of the liabilities which will result in the scheme’s liabilities increasing in the actuarial valuation as compared to the accounting valuation. There is a risk of a funding requirement arising on the full liabilities of the scheme (S75). However, this is being mitigated by closing the scheme to accrual.

Market risk
  • A suitably qualified representative board of trustees, which includes a professional independent trustee, manages the scheme and is responsible for regularly evaluating the effectiveness of investment decisions, the setting of actuarial factors for the liabilities and managing the administration. Professional investment advisers are used to assist in the management of the investment portfolios with a view to conservatively preserving and enhancing fund valuations. Complex investment risk models are run by the investment advisers and actuaries to assess optimum risk balance. The actuary also conducts a formal triennial valuation and provides updated figures on a real time basis.
  • Funding shortfalls are planned to be made up within sensible time frames via market anticipated increased interest rates, positive returns on investments and additional contributions from the company agreed as part of a 10-year recovery plan to bring the fund back to full funding on an accounting basis.
  • The defined benefit scheme in the United Kingdom was closed to new members in 2002 and the scheme is now mature with only minimal active membership. All new employees in the United Kingdom are automatically enrolled in the United Kingdom’s money purchase personal pension plan.
  • The risk of a S75 funding requirement arising on all the liabilities of the scheme is carefully monitored by the company and trustees. This can be managed by ensuring the company anticipates an event which could trigger a liability.
  • The company and trustees have agreed a long-term strategy for reducing funding risk as and when appropriate. This includes a liability-driven investment (LDI) policy which aims to reduce volatility of the funding level of the pension plan by investing in eg matching annuities (buy-ins) for pensioners which perform in line with the liabilities of the plan. In 2013 and 2016, the fund purchased buy-in insurance policy representing approximately 25% of the assets.
  • The accounting deficit has been reflected on the company’s balance sheet as a liability in line with international accounting standards.
6
Dependence on principals and suppliers

Significant businesses in the group are dependent on a small number of principals and/or suppliers.

Barloworld’s success is therefore linked to its ongoing reputation and good standing, financial stability, the competitiveness and quality of its products and services and the availability of equipment to meet customers’ needs.

In order to ensure sustainable value creation, the group depends on suppliers of infrastructure in the countries in which it operates. Most of the group’s businesses are dependent, inter alia, on reliable power and water supply and appropriate transport networks.

Strategic risk
  • Add value by giving constant feedback to the principals on customer requirements and expectations, market movements and product competitiveness.
  • Continually improve/build relationships with principals and major suppliers and strive to be a preferred dealer/customer.
  • Provide excellent customer service and lead in our markets.
  • Build long-term partnerships with customers.
  • Perform supplier due diligence assessments.
  • Build relationships with local authorities.
  • Align strategies and targets with those of the major principals as far as possible.
  • Implement initiatives to reduce dependency on infrastructural deficiencies and increase organisational resilience.
7
Exposure to political risks, sanctions, terrorism and crime in the countries in which Barloworld operates

The group’s people and assets are spread through numerous countries around the world, while its activities are conducted in many more.

The possibility exists that the group’s people and assets, and the viability of the businesses, may be exposed to sanctions, acts of terrorism, political turmoil or crime in some of the regions in which the group operates, as well as in those that may be identified for expansion.

Business growth initiatives require that new markets and territories are the focus of business expansion. These opportunities come with their own distinct risk exposures.

Operational risk
  • Minimise exposure in high-risk countries through in-depth risk assessments, coupled with the application of preventive and corrective risk management activities.
  • Monitor and ensure compliance with international sanctions.
  • Maintain flexible business models.
  • Maintain business continuity plans that incorporate emergency response actions, crisis management and business recovery plans specific to the businesses and the respective territories in which the businesses operate.
  • Optimise the geographic spread of operations.
8
Exposure to significant customers and dependence on channels to market

Barloworld is exposed to certain large customers and/or industries and well-established distribution and support channels that may change or consolidate.

Market risk
  • Build long-term partnerships with customers.
  • Develop customer solutions which differentiate and expand the group’s offering from product-based businesses to service and solutions focused.
  • Diversify customer base.
  • Develop new channels.
  • Monitor and anticipate competitor activity.
9
IT and information security-related risks

Barloworld’s strategy of providing innovative customer solutions by transforming its business from products to services and solutions which leverage technology to deliver productivity and performance benefits to its customers, gives rise to an increased risk related to information security and concomitant cybercrime attempts. As solutions are increasingly digitising and being connected to many external parties there is an increased risk relating to the protection of the confidentiality, integrity and availability of the group’s customers and its own information and data.

Employee/operational/strategic risk

Barloworld has implemented an updated information security approach which is underpinned by the implementation of group-wide information security policies.

The approach is based on the ability to:

    • Prevent, detect and respond to attempts to access the group’s information.
    • Restore confidentiality, integrity and availability of systems, information and data in the event of a breach.
    • Proactively train, promote and raise information security awareness.

    The approach includes all appropriate security mechanisms, physical, technical, organisational, human orientated and legal to keep all information protected against threats.

    Insurance cover has been effected to offset any losses that may arise from cyber risk.

10
Occupational health and safety risks

Barloworld’s key asset is its employees. The occupational health and safety risk is the likelihood of a person being harmed or suffering adverse health effects if exposed to a hazard in the workplace.

Employee/operational/strategic risk
  • Minimise exposure through in-depth risk assessments, coupled with the application of preventative and corrective risk management activities and policies.
  • Extensive communication and safety awareness programmes, training in accident prevention, accident response, emergency preparedness and the use of protective clothing and equipment, and extensive monitoring, reporting and review of safety data, all with the aim of ensuring a healthy and safe workplace.
11
Regulatory environment

Many of the group’s activities are governed by regulations. Due to the complexity and changing nature of these regulations across the industries and geographical spectrum of the group’s activities, there are challenges in staying abreast of all developments and maintaining full compliance.

Regulatory risk
  • Management is responsible for the ongoing monitoring of all pending and actual changes to the group’s regulatory environment. Due to the large number of jurisdictions in which the group operates, this monitoring occurs in each country of operation and activity.
  • Where feasible, the group will comment on, and attempt to influence proposed changes to the regulatory environment that it believes are contrary to its values or that may adversely affect the group in a particular jurisdiction.
12
Strategic employee skills

Barloworld’s key asset is the intellectual capacity and skills of its employees. This necessitates ongoing management of the challenges regarding recruitment, succession planning, skills retention and development.

Employee risk
  • Barloworld has a defined employee value proposition and methodology to ensure that it addresses value creation for its employees and aligns employees’ activities with the strategy of the organisation.
  • These identify and align all employee elements of a value-creating organisation to ensure sustainable intellectual capacity and value creation competence.
  • Through performance management systems, employees’ purpose, role, function and accountabilities are defined and fairly assessed, and, using competency-based assessments, employees are regularly reviewed to ensure meaningful careers, and that the appropriate skill sets are available to enable performance at optimum levels, and equitable reward.
  • Investments in training resources, mentoring and coaching continue to assist and encourage employees to enhance their levels of competence and performance.
  • An appropriate suite of reward and performance-based incentive schemes ensures recognition and value creation for employees.
13
Weak commodity prices

The effect of weak commodity prices including the decline in oil prices have contributed to the slow recovery of the group’s businesses, customers, suppliers and funders and to the continued risk that funding constraints within the supply chains could result in a recurring recession and/or impede growth. This, in turn, has negatively impacted many company investments.

Financial risk
  • Inflationary pressures to be carefully monitored and managed, as appropriate, in each business.
  • Focus on costs and cost reduction opportunities, and improve operating efficiencies.
  • Monitor customers’ ability to spend, access credit, and settle debt.
  • Reduce working capital, limit capital expenditure and improve cash flow.
  • Secure adequate committed borrowing facilities.
  • Maintain credit rating.

4.2

Barloworld’s 2016 CDP climate change and 2016 CDP water disclosure responses

Risk heat map

The heat map reflects the relative position of the group’s residual risks which are assessed on their probability, severity and quality of existing control environment. The occupational health and safety risks are not reflected on the heat map as our practice is not to attach a value to injuries or fatalities.

Risk heat map